Paying for long-term care can be expensive. As care costs continue to rise, it’s important to have a plan for how you’ll pay for care, if you need it as you age.
If you’re counting on Medicare to cover future long-term care (LTC) expenses, you may want to think again: Medicare is not designed to pay for long-term care. In fact, it only covers some long-term care costs for the first 100 days, but after that, there is no coverage.
To understand why, it’s helpful to consider that health insurance and long-term care insurance cover different parts of the wellness spectrum. Health insurance – like Medicare – is designed to pay for treatment to help you get better, while long-term care insurance is designed to provide assistance that helps you get through the day. In other words, long-term care supports your daily health and personal needs, such as getting dressed or using the bathroom, if you can no longer meet these needs without assistance.
So if Medicare doesn’t cover long-term care costs, what other options are there?
- Rely on loved ones for care
- Pay for care out of pocket
- Purchase a traditional long-term care insurance policy
- Use hybrid life/long-term care insurance
Rely on loved ones
Relying on your loved ones to take care of you can be a great way to get more personalized and affordable care than you might receive in a professional care setting.
If you do intend to rely on loved ones for care, it’s crucial to start having conversations about your desires and expectations for care with them now so no one is taken by surprise. If a loved one is a part of your care plan, they need to know about it so you can ensure they’re willing and able to provide you with the care you need.
It’s also important to consider the financial and emotional toll on caregivers. Caregivers may need to take time off work or reduce their hours and they may help pay for things insurance doesn’t cover such as modifications to your home to help make it safer for you to live in or gas to doctor’s appointments. These types of expenses often seem small at first but they can add up quickly. Being a caregiver can also be a source of stress in their own personal life, especially if they have families of their own.
And depending on the care needed, your informal caregiver may lack the skillset to provide quality care.
Pay for care out of pocket
Another option is to self-fund your care with existing assets. If you choose to pay for care out of pocket, you can maintain control of your assets and choose where and what type of care you’d like to receive – based on how much you want to pay. For many, the most appealing feature of self-funding is this aspect of control.
But you’re going to want to weigh that sense of control with the potential drawbacks of self-funding:
- You may need to withdraw funds from an asset before you planned to, which could have tax consequences.
- Paying for your care could deplete your assets and/or income, which could impact your partner’s way of life or the legacy you planned to leave to loved ones.
- Your retirement income plan may not be able to replenish the money you’re taking out for care, which could impact how long your money will last.
Purchase a traditional long-term care policy
A third way to pay for care is to purchase a traditional long-term care insurance policy. This is a private insurance plan that offers a pool of benefits you can purchase to help cover long-term care costs.1
To go on claim, you’ll need to be certified by a doctor as being chronically ill. Being chronically ill is different than having a chronic illness – chronically ill means you need assistance performing at least two activities of daily living (bathing, dressing, using the toilet, controlling bladder/bowel movements, moving around or eating) due to a loss of function, or you need supervised protection due to a severe cognitive impairment.
Depending on the policy structure and benefits, a traditional LTC policy may provide some of the most robust benefits to cover the costs for LTC. Traditional LTC insurance plans offer a variety of standard benefits, including coverage in a nursing home or assisted living facility, or at home. They also offer optional benefits, such as inflation riders, to help protect against rising care costs. Even more importantly, some policies offer joint coverage (meaning two people are covered by one policy).
Traditional LTC insurance benefits are a fixed amount calculated daily or monthly, with benefit periods generally ranging between two to seven years, with some companies offering lifetime coverage.
These policies typically pay benefits using a “reimbursement” method, meaning you will be repaid, dollar for dollar, for actual expenses incurred. Typically, you must first pay for your care expenses out-of-pocket, and then submit receipts and/or proof of payment to the insurance carrier for reimbursement. Only expenses covered by the contract will be reimbursed.
It’s important to note that unless you pay a lump-sum single premium when purchasing traditional LTC insurance, premium rates are not guaranteed and may increase over time. The premium for a traditional LTC policy may fit your budget when you first start the policy but the premium may continue to increase and could become unaffordable, especially in retirement.
Another potential drawback to consider is that if you don’t need LTC, you generally won’t receive any benefits from your policy. Additionally, traditional LTC may not be an option for everyone, as you’ll need to be in good enough health to medically qualify for a policy.
Use hybrid life/LTC insurance
Finally, another option to help pay for care is to buy a hybrid life/LTC insurance policy. Hybrid life/LTC insurance products combine a life insurance policy with “living” benefits for long-term care. These products are also referred to as asset-based LTC or linked-benefit policies.
A hybrid life/LTC plan typically includes two basic components:
- A base life insurance policy with a guaranteed face amount and death benefit. If you1 die before needing care, your family would receive the face amount of your policy as a tax-free death benefit. And if you died after exhausting your LTC benefit, your beneficiaries would still receive a guaranteed minimum death benefit.
- An agreement that provides LTC benefits. If you need LTC and qualify for benefits, this agreement would allow you to access your death benefit and use it to provide your initial LTC benefit pool. Some policies may also offer an additional agreement that allows you to extend your LTC benefits beyond your initial LTC benefit pool, which would allow the policy to provide an LTC benefit pool larger than the policy’s death benefit. Typically, these plans offer benefit periods that range from two to eight years.
As with traditional LTC insurance, to go on claim and receive benefits, you’ll need to be certified by a doctor as being chronically ill, which means you need help with at least two activities of daily living or you need supervised protection due to a severe cognitive impairment.
Hybrid life/LTC plans can be fairly robust in their coverage. Some plans pay for expenses associated with informal care from a family member or non-professional caregiver, and most will pay for care received at home or in a facility.
These policies use a reimbursement or cash indemnity method to provide LTC benefits: a reimbursement policy would reimburse you dollar per dollar for actual expenses you have already paid out-of-pocket, while a cash indemnity policy would automatically send you a monthly cash benefit, up to the maximum monthly benefit listed in your policy, regardless of actual expenses incurred.
A key difference between hybrid life/LTC insurance and traditional LTC insurance is that hybrid policies guarantee premiums will never increase and benefits will never decrease. That said, a potential drawback of hybrid policies is that they typically offer shorter payment schedules than traditional LTC, which can make them more expensive in the short-term. And like traditional LTC, you will need to be healthy enough to qualify for these policies.
